The rules are specific and require total compliance
to ensure that the lender or factor can collect assigned
accounts from the federal government.

But what about financing or factoring receivables
owed by state governments or their sub-divisions? If
an account debtor that is a unit of a state government
receives notification under UCC 9-406 to make payment
to a factor, is it obligated to honor such notification?
Section 9-109 of the UCC addresses the scope of Article
9: “[t]his chapter does not apply to … [a]ny transfer by a
government or governmental unit.” A Florida appellate
court recently addressed that issue.

A basic principle in commercial finance law is the
right to place account debtors on notice and to rely on
the effectiveness of such notice. Account debtors that
fail to abide by the notification remain obligated to the
assignee of the account — the secured party.

Factor Provided Notification

In the Florida case, the debtor provided roadside assistance to the Florida Department of Transportation. The
factor provided the department with notification that
the debtor’s accounts had been assigned to the factor
and that all future payments should be made to the
factor. The notification stated that payment to any other
party would not discharge the department’s obligations
on the accounts.

Section 9-406 provides in part:
[A]n account debtor on an account, chattel
paper, or a payment intangible may discharge
its obligation by paying the assignor until,
but not after, the account debtor receives a
notification, authenticated by the assignor
or the assignee, that the amount due or to
become due has been assigned and that
payment is to be made to the assignee. After
receipt of the notification, the account debtor
may discharge its obligation by paying the
assignee and may not discharge the obligation by paying the assignor.

Although it received the notices, the departmentnonetheless continued to pay the debtor and refusedto pay the factor. The department claimed that > >…a term in an agreement between anaccount debtor and an assignor or in a prom-issory note is ineffective to the extent that it( 1) prohibits, restricts, or requires the consentof the account debtor or person obligatedon the promissory note to the assignmentor transfer of, or the creation, attachment,perfection, or enforcement of a securityinterest in, the account, chattel paper,payment intangible or promissory noteBut the UCC falls under state law and is not bindingon the federal government or its divisions. And the U.S.has historically been unreceptive to assignments of itscontracts absent its prior consent. In general, federalanti-assignment statutes prohibit assignments, in part,to minimize susceptibility to fraud and to protect itsrights of set off.

Federal Anti-Assignment Law Revised

Traditionally, federal anti-assignment law made itimpractical for a lender or factor to make advancesagainst federal government accounts. As the U.S. waspreparing to enter World War II, it became necessaryto ease these restrictions to allow government contrac-tors to obtain the necessary financing to manufactureproducts needed to support the war effort. The federalAssignment of Claims Act of 1940 was amended from1951 through 1996 and was ultimately repealed andreplaced with more practical provisions in 2011. Section6305 of the present act provides:The party to whom the federal governmentgives a contract or order may not transferthe contract or order, or any interest in thecontract or order, to another party.

…Notwithstanding … amounts due from
the federal government under a contract
may be assigned to a bank, trust company,
federal lending agency or other financing
institution.

The assignment must be for a contract in excess
of $1,000, may not be made if the contract expressly
forbids the assignment and must be for all amounts
due under the contract. Multiple assignments are not
permitted (e.g. no subordinated interests). The assignee
must file written notice and a copy of the assignment
with the government agency that is a party to the
contract, with the surety on any bond, if any; and
with the disbursing officer, if any, designated to make
payment. Section 3727 of the act has other provisions
that must be observed.

The takeaway is that state governments are subject tonotification like any other account debtor, other than thefederal government. The key is following the proceduresproscribed in the Assignment of Claims Act.